Wednesday, January 14, 2009

Retail sales literally collapsed from August through December, falling at an annualized 24% rate. A good portion of this was due to falling gasoline prices, but there's no avoiding the fact that we've never seen anything like this in modern times in this country.

If this were to continue we'd be in a depression before too long. But it's important to remember that there is a lot of psychology in these numbers. People cut back on their spending because the financial markets were in free-fall and our leaders were warning that the situation was dire and massive government intervention was necessary to avoid catastrophe. My wife and I cut back on our spending, just to be prudent. Everyone I know has cut back; it's no wonder that the line on this chart has turned down with a vengeance. Our political leaders couldn't have done a better job of eroding confidence.

Like jobs, which are a lagging indicator, I see retail sales as also a lagging indicator. That's why I pay much more attention to what's happening on the margin in real-time markets: e.g., swap spreads, implied volatility, the TED spread, credit spreads, commodity prices, shipping rates, currencies, gold, etc. All of these things have registered significant improvement in recent weeks and months. I continue to think we've seen the worst of the news, and that the economic and financial fundamentals are on the mend. Sooner or later this will bubble up to the level of newspaper headlines, and consumers' fears will be assuaged. Spending has the potential to bounce back almost as fast as it declined.

It's also important to track changes in the likely direction of policy: for example, the risk of higher taxes has fallen significantly in recent months, and it's now increasingly likely that some taxes will be cut. Obama seems to be backing off on his pledge to unilaterally renegotiate NAFTA. He even had dinner last night with George Will and a host of leading conservatives—imagine that!

7 comments:

It has been my feeling that while the average consumer makes, say $50,000 then he/she has been spending like they make $60,000 (using credit). The economy, and retailers, have to get used to the fact that they will now just spend the $50,000 or say 20% less. Short term readjusting to the new reality is painful, but better off for all in the long run.

Despite the bigger than expected drop in retail sales during December (2.7% decline), I completely agree with you that retail is a lagging indicator. Retail markets are going to be fickle right now, as people cut down on non-necessities. But once the panic subsides I don’t see why they won’t start to show improvement. I am seeing all these doom and gloom reports and it is refreshing to see someone who takes in to account the big picture! Keep up the great work.

Obama will get all the credit for the recovery, you can bet on that. And if things get worse, it will all be Bush's fault.

Obama has done some good things (throwing a lot of his far-left policy promises under the bus) but it seems to me that all his talk about the need for a massive stimulus package doesn't make anyone feel better about the future. If he could back down from his attempt to engineer a massive expansion of government we could see a surge of badly-needed optimism.

The financial sector has been steadied, but the real economy continues to contract. The fact that we've not seen a serious recession since 1990 makes it all the worse.

On a personal level, I try to take one step at a time, trust myself and my judgement and remain optimistic. Having Obama in charge also eases my anxiety level, in that I know he has my best interests at heart -- or at least those of my children.

2008 was the tipping point for 30 years of consumerism fueled by credit and declining interest rates. We should get used to the look of this chart as the economy moves towards a more balanced and healthy approach to longer term growth i.e. consumption/production. There is plenty of slack and redundancy left in the system and it will take a few years for the purge to be complete. The markets seem to be gravitating towards a similar conclusion, that it will be a long and bumpy road ahead!